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Give Bernanke Credit—For Chutzpah

In my mind’s eye, I envision a street fair—one of those happy community gatherings at which sellers of handcrafted ceramics, funky clothing, herbal remedies, fresh vegetables, and edible delicacies congregate to display their wares for the strolling customers, who chat amiably with the stall-keepers and with one another. Suddenly, amid horrified shrieks and the roar of a giant engine, a truck plows through this placid setting, scattering twisted debris and broken bodies in its wake. Finally, after wreaking a hundred-yard swath of death and devastation, the truck stops, and the driver, Ben Bernanke, climbs down from the cab.

“People, people,” he exhorts them in a calm, world-weary voice, “do not panic. I am here to assess the damage and make recommendations for reforms that will prevent a recurrence of this unfortunate and wholly unforeseen act of God.” Whereupon he proceeds to lay out his assessment and recommendations, always speaking in the same quiet, unemotional voice. The stunned and wounded survivors gaze at him in astonishment. “He’s a madman,” one cries out.

Undismayed by the swelling chorus of curses and the groans of the injured, the truck driver addresses the gathering crowd of stunned onlookers. “We must have a strategy that regulates the street-fair system as a whole . . . not just its individual components.” He then methodically lays out a series of recommendations for strengthening the construction materials of stalls and regulating their placement along the street, for ensuring that each transient merchant have an adequate capital cushion against such crises, for monitoring fruitmongers and hippy artists deemed “too big to fail,” to keep them from taking excessive risk. He proposes that the city council consider new ordinances to require that wooden crafts such a birdhouses be made sturdier and to establish a “limited system of insurance” to protect against customer runs on the most daring drug-paraphernalia sellers.

“Moreover,” he continues, “street fairs are too important to be left for each town to regulate on an ad hoc basis.” He proposes that the rules be harmonized among the mayors of all the world’s great cities and that a global street-fair authority be created to monitor street-fair risks and protect the people from accidents such as the one that has just occurred. Listeners look on in amazement, their mouths agape.

With that walk on the imaginary side as a warmup, I invite you to consider the speech Bernanke gave to the Council on Foreign Relations today, March 10, 2009. In this address, he proposes a sweeping overhaul of the regulation of “the financial system as a whole . . . not just its individual components.” According to the Associated Press report,

Bernanke offered new details on how to bolster mutual funds and a program that insures bank deposits. He also stressed the need for regulators to make sure financial companies have a sufficient capital cushion against potential losses.

. . .

To guide the regulatory overhaul, Bernanke laid out four key elements. One is for Congress to enact legislation so the failure of a huge financial institution can be handled in such a way to minimize fallout to the national economy—similar to how the Federal Deposit Insurance Corp. deals with bank failures. Such “too big to fail” companies must be subject to more rigorous supervision to prevent them from taking excessive risk, he said.

. . .

Policymakers also should consider ways to bolster money market mutual funds that are susceptible to runs by investors, Bernanke said. That could be done by imposing tighter restrictions on the financial instruments that money markets can invest in or through a limited system of insurance for certain funds. Bernanke also called for a review of regulatory policies and accounting rules, suggesting a larger financial buffer for the FDIC’s insurance program for bank deposits that could be used when conditions worsen. Capital regulations for banks and other financial institutions also must be “appropriately forward-looking” to ensure sufficient money is set aside against potential losses.

These proposals certainly answer the question, How do you make a byzantine regulatory system more byzantine by an order of magnitude? At the same time, they show how you display a conviction that if only you tinker with the apparatus long enough, you can make monetary central planning work, even though central planning has always and everywhere produced economic calamity.

All of this second-order handwaving might be dismissed as touchingly naive or as workaday establishment obtuseness, were it not such transparent grasping for power in the fashion that crisis always brings to the fore in a world entranced by the ideology of salvation by the grace of government. Bernanke concludes that “the government should consider creating an authority specifically responsible for monitoring financial risks and protecting the country from crises like the current one.” And who, pray tell, might fill these mighty shoes? Well, of course, none other than the Federal Reserve System, over which Ben Bernanke presides with such placid and self-confident mien.

In view of the Fed’s fundamental, if wholly unacknowledged, role in bringing about the world’s present economic debacle – by spewing forth the ample fuel that allowed the recent ill-fated mania in real estate and related financial dealings to flame so high ― the question that Bernanke’s current proposals immediately raise could not be more obvious: Quis custodiet ipsos custodes? Until someone can provide a compelling answer to this insistent question, we will be well advised to ignore, or even to denounce, the proposals advanced by this lunatic truck driver.